Entity Structure and Taxes: An Analysis of Embedded Pass-Through Entities

The Accounting Review, Forthcoming

50 Pages Posted: 27 Jan 2021

See all articles by Ashish Agarwal

Ashish Agarwal

University of Texas at Austin - Red McCombs School of Business

Shannon Chen

University of Arizona - Department of Accounting

Lillian F. Mills

University of Texas at Austin - McCombs School of Business

Date Written: August 16, 2020

Abstract

We examine the effect of pass-through entities embedded in corporate structures on tax avoidance, tax uncertainty, and tax noncompliance using unique, confidential tax return data that link corporations and pass-through entities together through Schedules K-1. We develop measures of the use of pass-through entities such as the number and “connectedness” of pass-throughs within the structure, the presence of loss pass-throughs or asymmetric allocations of such losses, and connections to entities external to the firm. We predict and find that these features are associated with lower effective tax rates, higher current year additions to tax reserves, and larger amounts of proposed IRS audit adjustments, controlling for probability of audit selection. This large-sample evidence could help the IRS understand how pass-throughs affect compliance and financial statements users anticipate the tax effects related to entity structure.

Keywords: Tax avoidance, tax uncertainty, tax noncompliance, entity structure

JEL Classification: H20, H26, L22, M41

Suggested Citation

Agarwal, Ashish and Chen, Shannon and Mills, Lillian F., Entity Structure and Taxes: An Analysis of Embedded Pass-Through Entities (August 16, 2020). The Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3743370

Ashish Agarwal

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Shannon Chen (Contact Author)

University of Arizona - Department of Accounting ( email )

Tucson, AZ 85721
United States

Lillian F. Mills

University of Texas at Austin - McCombs School of Business ( email )

Austin, TX 78712
United States

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